Corporate Front: Strategy, Will The Tata Group Bag ACC?

Only if Group CEO Ratan Tata can strike a mutually-acceptable deal with the financial institutions to buy their holdings at a price he can afford.

Corporate Front
Other Stories

Can IBP Distil A New Future For Itself?

Who'll Drink To Herbertsons?

Can Peerless Finance A Sustainable Future?

Will R&D Prescribe Success For Sun Pharma?

Can ABN-AMRO Bolster Its India Account?

CavinKare Works Up A Herbal Lather

It was only 60 minutes before the Extraordinary General Meeting (EGM) of the Associated Cement Companies (ACC) that the financial institutions appeared to have finalised their plans. At a hurriedly-held board meeting on January 7, 1999, the 2 nominee directors, representing the Industrial Development Bank of India (IDBI) and the Unit Trust of India (UTI), rejected the company's amended proposal to issue 90 lakh warrants or equity shares to all its 1.35 lakh shareholders. Subsequently, at the EGM, ACC was even forced to withdraw its earlier resolution to issue warrants or shares, worth Rs 99 crore, only to its promoters, the Tata Group. However, the Rs 189-crore rights issue was approved at the EGM.

Unknown to either the ACC management or the Tata Group, the actual decision had been taken a few days before the EGM by the 2 institutions, who together hold a 20.63 per cent stake in ACC. And that may prove pivotal in determining whether the Tata Group will control ACC--or whether someone else will take it over. For, it was then that the institutions thought of selling their stake in ACC to either the Tata Group or to a "strategic partner." Indeed, the IDBI may even have received an offer of Rs 250 per share (face value: Rs 10) from a cement transnational although no one was willing to comment on it. This is more than twice the price of Rs 110 per share that the Tata Group was willing to pay for the preferential warrants to increase its stake from 13.03 to 17.80 per cent.

Explains Basudeb Sen, 48, Executive Director, UTI: "The financial institutions, which are operating in a dynamic environment, have to look at alternate ways of getting more value for their investments." And if the 2 financial institutions--which, along with the Life Insurance Corporation, the General Insurance Corporation, and other public sector mutual funds hold a 29.44 per cent stake in ACC--do invite a new partner, Ratan Tata, 60, the Chairman of the Tata Group, might lose control over the company. Unless, that is, he accepts the institutions' proposal, supported by G.P. Gupta, 58, Chairman, IDBI.

Gupta feels that the Tata Group can increase its holdings by buying the shares from the financial institutions. The price-tag: Rs 250 per share (face value: Rs 10)--which is 98 per cent higher than the effective market price of Rs 126.20. While ACC plans to reduce the face value of its share from Rs 100 (current market price: Rs 1,262) to Rs 10, as per a resolution approved by the shareholders at the EGM on January 7, 1999, the institutions' asking-price is 55 per cent higher than the UTI's average acquisition cost of Rs 161 per share for its 9.08 per cent stake. Says a senior executive in a financial institution: "Since we don't want to destabilise the existing management in ACC, we may sell the shares to the Tata Group. While fulfilling Tata's objective, this will help the institutions earn profits too."

True, since the IDBI stalled ACC's attempts to issue preferential warrants to the Tata Group only because the price was low. After all, the company had issued shares at Rs 4,000 per share (face value: Rs 100) when it came out with its Rs 85.63-crore rights issue in January, 1995. However, the price of Rs 110 per share for the proposed preferential offer was fixed as per the Securities & Exchange Board of India's guidelines, which specify that it should be the average of the daily market price in the last 6 months. In addition, the price was double the Rs 55-per-share being paid by all the shareholders under the proposed Rs 189-crore rights issue--apart from the Rs 99-crore warrants issue--which was to open after the allotment of the preferential warrants.

The controversy has also centred around whether the Tata Group is, indeed, the promoters of ACC. That is debatable. In 1936, the late F.E. Dinshaw merged 4 independent cement companies to form ACC. And, right from its inception, ACC was a professionally-managed company. The offer document for the 1995 rights issue made similar claims. But although ACC is not part of the Tata Group in the legal sense of the term, the Tata Group, according to Tata Sons' Director Noshir A. Soonawala, has remained its single-largest shareholder. Only financial institutions like the IDBI have higher stakes.

But then, a preferential allotment can be made to any shareholder--not necessarily a promoter--subject to the shareholders' approval. Section 81 of the Companies Act, 1956, states that, in such cases, the company has to specify the name of the shareholder(s), the number of shares/warrants to be issued to them, and the price at which the shares/warrants would be issued. Thus, its status will not affect the chances of the Tata Group's being given the allotment.

Even so, Ratan Tata will need to explore other options to increase the Tata Group's existing stake in ACC before agreeing to buy the shares from the financial institutions. For one, buying the shares from the institutions will entail a huge investment of Rs 205 crore (at Rs 250 per share)--compared to Rs 99 crore under the now-rejected preferential issue--to increase the Tata Group's stake to 17.80 per cent. The actual burden could be higher since the Tata Group may be forced to buy out the entire institutional holdings of 29.44 per cent--which it wants to avoid. To avoid such heavy costs, the Tata Group--which has increased its holdings in ACC from 11 to 13.03 per cent through open market purchases in the past 12 months--decided against the creeping acquisition route under the Takeover Code.

While this would have enabled it to pick up a 5 per cent stake every year, Pallonji Shapoorji Mistry, 69, Chairman, ACC, maintains that "it was not possible for the Tatas to increase their stake further through the creeping acquisition route." That's because if the holdings had gone beyond 15 per cent, it would have triggered off the Takeover Code, and forced the promoters to make an open offer for an additional 20 per cent stake. This would have forced the Tata Group to shell out Rs 350 crore (at the current market price). So, Tata opted for preferential warrants.

But with the institutions having shot down that proposal, the Tata Group proposed that the warrants be offered to all the shareholders, with a minimum allotment of 50 warrants per shareholder. Each warrant would have been converted into 1 equity share. But since the institutions rejected this option too, the company may now decide to increase the size of the proposed rights issue, and have the unsubscribed portion picked up by the Tata Group. At the moment, a larger rights issue seems to be the best alternative available. Mistry, however, is unsure about the Tata Group's future plan, and says: "The company will have to reconsider its plans (about) how to bridge the (resource) gap."

What is certain, though, is the Tata Group's need to increase its stake to thwart takeover threats. And ACC requires funds to finance its proposed Rs 700-crore investment plan over the next 3 years. The money will be utilised to expand its units in Gagal (Himachal Pradesh), Kymore (Madhya Pradesh), Madukkarai (Tamil Nadu), and Wadi (Maharashtra), which will increase capacity from 12 million tonnes per annum (MTPA) to 15 MTPA. But given ACC's high debt-equity ratio of 1.5:1, and a huge debt-burden of Rs 1,483 crore, the equity route is the only viable way to attract funds. A combined warrants-and-rights issues would have reduced the company's debt-equity to 1.3:1 by raising its equity-base from Rs 136.33 crore to Rs 180 crore.

Explains Pradip Mehtani, 28, an analyst with the Mumbai-based Jardine Fleming India Securities: "The cash-inflow (through equity) will help reduce the gearing ratio and interest costs substantially since the money can be used to retire a portion of the existing debt." Clearly, ACC has to put its financial house in order to wrest back its undisputed leadership position in the Indian cement industry. It also needs to be more aggressive in the M&A game; recently, the company lost out on its bid for TISCO's 1.70-mtpa plant to the Paris-based Lafarge Group. Obviously, the future of both the Tata Group and ACC lies in their ability to cement a mutually-acceptable deal with the financial institutions.